Regulation (EC) No 138/2004 of the European Parliament and of the Council of 5 December 2003 on the economic accounts for agriculture in the Community (Text with EEA relevance)

• (c) compulsory taxes not raised by general government or the institutions of the European Union and which, although borne by agriculture, are settled by a client branch. These payments should be accounted for in the intermediate consumption of the user branch;

• (d) taxes normally levied on profit or wealth, such as equalisation taxes, income tax, corporation tax and wealth tax. These should be included as current taxes on income, assets, etc. in the secondary distribution of income account;

• (e) taxes on inheritance and gifts and special wealth taxes. These should be included as capital taxes in the capital account;

• (f) water rates whose amount is linked directly or indirectly to the quantity of water consumed.

E. SUBSIDIES

• (cf. ESA 2010, 4.30 to 4.40)

• 3.051. Subsidies are current unrequited payments which general government or the institutions of the European Union make to resident producers, with the objective of influencing their levels of production, their prices or the remuneration of the factors of production. Other non-market producers can receive other subsidies on production only if those payments depend on general regulations applicable to market and non-market producers as well.  By convention, subsidies on products are not recorded in non-market output (P.13) (cf. ESA 2010, 4.30).

• 3.052. Subsidies are classified into:

• — subsidies on products (D.31): — import subsidies (D.311), — other subsidies on products (D.319), and

• — other subsidies on production (D.39).

• 1. Subsidies on products

• 3.053. Subsidies on products are subsidies payable per unit of a good or service produced or imported. The subsidy may be a specific amount of money per unit of a good or service, or it may be calculated ad valorem as a specified percentage of the price per unit. A subsidy may also be calculated as the difference between a specified target price and the market price actually paid by a buyer. A subsidy on a product usually becomes payable when the good is produced, sold or imported.  By convention, subsidies on products can only pertain to market output (P.11) or to output for own final use (P.12) (cf. ESA 2010, 4.33).

• 3.054. Import subsidies consist of subsidies on goods and services that become payable when the goods cross the frontier for use in the economic territory or when the services are delivered to resident institutional units.  They may include losses, incurred as a matter of deliberate government policy, by government trading organisations whose function is to purchase products from non-residents and then resell them at lower prices to residents (cf. ESA 2010, 4.34).

• 3.055. Subsidies on products are accounted for in the basic price (cf. 2.082 to 2.086) at the time of the valuation of output and therefore do not appear in the industry's generation of income account. Subsidies on products which relate to the acquisition (i.e. imports or others) of intermediate consumption products or fixed capital goods, and which lead to a reduction in the purchaser prices of these goods, are taken into account by using purchaser prices in the valuation of intermediate consumption or GFCF (cf. 2.110 to 2.113); correspondingly, this leads to a reduction of the costs of these products or goods.

• 3.056. The method of valuation of output at basic prices requires a fundamental distinction between subsidies on products and other subsidies on production. Subsidies on agricultural products ([^E0044]) can be paid either to agricultural producers or to other economic operators. Only subsidies on products which are paid to agricultural producers are added to the market price received by producers to obtain the basic price. Subsidies on agricultural products paid to economic operators other than agricultural producers are not entered in the EAA.

• 3.057. Subsidies on products should be recorded at the time when the transactions or events which give rise to them (production, sale, import, etc.) take place, so as to preserve the consistency with the other accounts (i.e. the measurement of output at basic prices). Thus, compensatory aid for arable crops should be recorded at the time of harvest whereas special premiums for cattle and suckler cows and premiums for ewes are recorded at the time the animals are kept and/or the date of the grant application.

• 1. Other subsidies on production

• 3.058. Other subsidies on production consist of subsidies other than subsidies on products, which resident producer units may receive as a consequence of engaging in production. For their other non-market output, other non-market producers can receive other subsidies on production only if these payments from general government depend on general regulations applicable to both market and non-market producers (cf. ESA 2010, 4.36). The ESA 2010 refers to four other subsidies on production (cf. ESA 2010, 4.37): subsidies on payroll or workforce, subsidies to reduce pollution, grants for interest relief, and over-compensation of VAT. These payments relate mainly to the assumption of production costs or support for changes in the method of production.

• 3.059. Since output is valued at basic prices, only other subsidies on production are recorded in the generation of income account (as negative uses).

• (a) Type of beneficiary

• 3.060. Beneficiaries of subsidies must normally produce market goods and services or goods and services for own final use. Market goods and services are all the goods and services which are released or intended for release on the market. They include products sold, bartered, used for payment in kind or stored prior to being put to one or more of the above uses at a later date. Production for own final use involves products which are preserved for purposes of final consumption or GFCF by the same unit. Nevertheless, non-market producers may benefit from other subsidies on production if they are payable under general regulations applicable to market and non-market producers alike.

• 3.061. The production of market services also includes commercial and storage services. Subsidies can therefore also be granted to the trade and market-regulating agencies whose function is to buy, store and resell agricultural products (cf. 3.068 and 3.069 on market-regulating agencies).

• (b) Purposes of other subsidies on production

• 3.062. Other subsidies on production can, under the  ESA 2010, be granted in cases where their impact on selling prices or adequate remuneration of the factors of production are not necessarily the main purpose of the subsidies. For example, financial aid may be granted to agricultural production in order to safeguard the cultural and natural heritage, promote tourism in a particular region or to protect the soil against erosion, regulate the natural water balance or influence the climate.

• (c) Payment criterion

• 3.063. With the exception of interest-rate subsidies, which are a special type of subsidy, other subsidies on production are attributed to the generation of income account of the production branches or the sectors to which they are paid. As a result of this method of attributing subsidies, the EAA do not account for all grants made to agriculture. Apart from direct aid, agricultural production units benefit from subsidies (within the meaning of the  ESA 2010) paid to up- and downstream production branches and, especially, market-regulating agencies ([^E0045]).

• 3.064. In the case of agriculture, the most important types of other subsidy linked to production are:

• — wage and payroll subsidies,

• — grants for interest relief (cf. ESA 2010, 4.37(c)) made to resident producer units, even when they are intended to encourage capital formation ([^E0046]) . In effect, these are current transfers designed to reduce producers' operating costs. They are treated in the accounts as subsidies to the producers benefiting from them, even when the difference in the interest is, in practice, paid directly by the government to the credit institution making the loan (by way of derogation from the payment criterion),

• — over-compensation of VAT resulting from the application of the flat-rate systems (cf. 3.041 and 3.042),

• — the assumption of social security contributions and real-estate taxes,

• — the assumption of other costs such as private storage aid for wine and grape must and the re-storage of table wines (in so far as the stocks are owned by an agricultural unit),

• — various other subsidies on production:

• — grants for land set-aside (compulsory set-aside linked to acreage-based grants and voluntary set-aside),

• — financial compensation for withdrawals of fresh market fruit and vegetables. These payments are often made to groups of market producers, and should be treated as subsidies to agriculture, since they are direct compensation for loss of production,

• — cattle premiums for seasonal adjustment (deseasonalisation) and extensification,

• — grants for agricultural production in less-favoured and/or mountainous areas,

• — other grants intended to influence methods of production (extensification, techniques designed to reduce pollution, etc.),

• — amounts paid to holders as compensation for recurrent losses of goods in inventories such as crop or livestock products which are considered to be work in progress and plantations in so far as they are still in their growth period (see 2.040 to 2.045). By contrast, compensatory transfers for losses of goods in inventories and/or plantations used as factors of production are recorded as other capital transfers in the capital account.

• 3.065. Applying the accrual principle to the recording of other subsidies on production can be a delicate matter. As it is difficult to draw up a general rule, this principle should be applied with consistency, flexibility and pragmatism. Because a large number of subsidies to agriculture are linked to production and the factors of production (acreage, herd, etc.), these subsidies should usually be recorded at the time of production or when the factors of production are acquired (especially in the case of land and livestock). In the case of subsidies which are not directly linked to production or the factors of production, it is difficult to determine the time of the transaction which gives rise to them and to distinguish it from the time when the subsidies are paid. In this particular case, subsidies are recorded when they are received.

• 3.066. The following special treatments are recommended:

• — compensatory payments for arable land which is set aside: at the time when the area to be set aside is stated,

• — withdrawals of products (fruit/vegetables): at the same time as the physical withdrawal during the crop year and not the calendar year, in order to ensure consistency between the estimation of output, less withdrawals during the crop year, and the recording of subsidies (as negative uses) in the generation of income account,

• — grants for cattle production (extensification premium, etc.): the moment when the animals are acquired by the holders and the date of the grant application,

• — assumption of costs (including interest relief): the time when the expenditure and interest are due,

• — compensation for recurrent losses affecting output (crops, livestock and plantations which are still in their growth period, cf. 3.064): at the moment when the output is recorded in the EAA (if the exact amount of the compensation is known with certainty),

• — other subsidies not directly on products or factors of production (direct income support, aid to less-favoured areas, etc.): it is recommended that the criterion depending on the time of payment continues to be used, because it is difficult to determine when the application for compensation was filed and whether the amounts in question are accurate.

• 3.067. The EAA does not treat the following as subsidies:

• — current transfers which, although they are subsidies within the meaning of the EAA, are not paid to agricultural production units. Most of these transfers are subsidies paid to market-regulating agencies. Although the amounts paid can affect the selling prices of agricultural products and therefore constitute a stimulus to agriculture, they should be recorded according to the payment criterion under the heading devoted to the branch of production which receives them,

• — current transfers to agricultural producer units by a market-regulatory agency. These should be recorded as components of output of the product in respect of which the transfer is paid insofar as the market-regulatory agency is involved only in the purchase, sale or storage of the goods. If, however, the agency is involved only in paying subsidies, then current transfers to producer units should be recorded as subsidies (cf. 3.068 and 3.069),

• — exceptional transfers by professional bodies to agricultural production units. These transfers cannot constitute subsidies since professional bodies are not general government,

• — current transfers by general government to households in their capacity as consumers. They are treated either as social benefits or as miscellaneous current transfers. The former include certain public grants for structural change, such as financial aid for the vocational retraining of holders,

• — capital transfers: these are different from current transfers in that they involve the acquisition or disposal of an asset or assets by at least one of the parties to the transaction.  Whether made in cash or in kind, they should result in a commensurate change in the financial, or non-financial, assets shown in the balance sheets of one or both parties to the transaction (cf. ESA 2010, 4.145). Capital transfers cover capital taxes, investment grants and other capital transfers (cf. ESA 2010, 4.147). They are recorded in the capital account of the sector/industry as changes in liabilities and net value. Some types of aid to agriculture are capital transfers. The most important of these are: — grants for converting orchards/vineyards (not subject to a replanting obligation), which constitute other capital transfers, — grants for restructuring orchards/vineyards (subject to a replanting obligation), which are investment grants, — grants for the cessation of or reduction in milk production: these are recorded as other capital transfers in so far as they have an explicit or implicit impact on the value of quotas,

• — transfers by general government to agricultural corporations and quasi-corporations intended to cover losses accumulated during several financial years or exceptional losses due to factors beyond the enterprise's control. These transfers should be classified as other capital transfers,

• — compensation paid by general government or the rest of the world (i.e. from abroad and/or by the institutions of the European Union) to the owners of fixed capital goods engaged in the production of agricultural products, as a result of exceptional and catastrophic losses such as the destruction of or damage to these goods caused by acts of war, other political events or natural disasters (cf. 2.045). These payments should be classified as other capital transfers (cf. 3.096),

• — cancellations of debts which the producers of agricultural products have contracted with general government (e.g. advances from general government to a producer enterprise which has accumulated operating losses over several financial years). The  ESA 2010 states that these transactions should also be classified as capital transfers,

• — the abatement or lowering of taxes on production, income or wealth is not explicitly stated in the  ESA 2010 or, consequently, in the EAA, since only taxes which are actually levied are accounted for,

• — shares and participating interests held by general government in the capital of agricultural corporations and quasi-corporations. These are recorded as shares and other participating interests.

• (d) Market-regulatory agencies

• 3.068. In a breakdown of the economy, market-regulatory agencies are assigned as follows:

• (a) where concerned exclusively with the purchase, sale or storage of goods:
• (i) by industry, to trade; this activity is deemed by convention to be the output of non-financial market services;
• (ii) by sector, to non-financial corporate and quasi-corporate enterprises, if these market-regulating agencies are considered as institutional units within the meaning of the ESA 2010, and if not, to the sector to which the larger unit belongs;

• (b) where concerned exclusively with the payment of subsidies:
• (i) by industry, to the branches of non-market output of general government, since only the government (apart from institutions of the European Union) can pay subsidies according to ESA 2010 ruling;
• (ii) by sector, to the sector general government (cf. preceding indent);

• (c) where concerned with both purchase, sale and storage of goods and the payment of subsidies:
• (i) by industry, to the branch trade, as regards their units of production (of the local KAU type) which buy, sell or store goods, and to the branches of non-market output of general government, together with its production units;
• (ii) by sector, to the sector general government, since only general government can pay subsidies. Assignment to another sector would mean that the subsidies paid by the market-regulating agency no longer constituted subsidies within the meaning of the ESA 2010.

• 3.069. A consequence of the strict application of the payment criterion is that various subsidies within the meaning of the  ESA 2010 do not appear in the EAA, since they are recorded under the branches and sectors to which the subsidies are paid.  In particular, if market-regulatory agencies are assigned to the sector general government, subsidies paid to the agencies in connection with market-regulating processes (purchase, storage and resale) appear as ‘Uses’ but also as ‘Resources’ in the sector general government. Consequently, subsidies (i.e. other subsidies on production) may be made by general government to other general government agencies.

F. PROPERTY INCOME

• (cf. ESA 2010, 4.41 to 4.76)

1. Definition

• 3.070. Property income is the income receivable by the owner of a financial asset or tangible non-produced asset in return for providing funds to, or putting the tangible non-produced asset at the disposal of, another institutional unit (ESA 2010, 4.41).

• 3.071. The ESA 2010 classifies property incomes in the following way:

• — interest (D.41),

• — distributed incomes of corporations (dividends and withdrawals from income of quasi-corporations) (D.42),

• — reinvested earnings on foreign direct investment (D.43),

• — other investment income (D.44): investment income attributable to insurance policy holders (D.441), investment income payable on pension entitlements (D.442); investment income attributable to collective investment funds shareholders (D.443),

• — rents (D.45).

• 3.072. The EAA are concerned only with property income accounted for in the entrepreneurial income account (cf. sequence of accounts, 1.38 to 1.48). This account records on the resources side income received by units as a result of their direct participation in the production process (operating surplus/mixed income) and receivable property income received. It records on the uses side payable property income linked to agricultural activities (and inseparable non-agricultural secondary activities). Generally speaking, the entrepreneurial income account can only be calculated for the institutional sectors, although it may be calculated for an industry if certain property income can be attributed to local KAUs.

• 3.073. Only three types of property income can be of relevance to the EAA:

• — interest (D.41), rents (D.45) and investment income attributable to insurance policy holders (D.441).

2. Interest

(ESA 2010, 4.42- 4.52)

• 3.074. Interest is the charges payable on a capital loan. It includes payments to be made at intervals, fixed in advance, of a percentage (fixed or otherwise) of the value of the loan. In the EAA, interest is the counterpart of loans granted to meet the needs of agricultural holdings (for example, with a view to acquiring land, buildings, machines, vehicles or other equipment, even if these are used in the context of inseparable non-agricultural secondary activities).

• 3.075. Interest also includes payments relating to leasing of fixed capital goods for their use in agriculture (possibly including land). Only the rent part (treated as an imputed loan granted by the lessor to the lessee) paid by the lessee is included under payment of interest (the capital part is recorded in the financial account).

• 3.076. It should be noted that notional interest on fixed equity capital in agricultural holdings is not recorded under this heading; it appears as a component of the income of the agricultural enterprise (cf. 5.06). Similarly, the amount to be recorded as interest payable includes interest-rate subsidies to agriculture.

• 3.077. Interest receivable in connection with agricultural activities by units belonging to corporate agricultural enterprises should also be recorded. Interest receivable by individual enterprises is excluded from the measure of entrepreneurial income of the agricultural industry, since it was felt that the majority of interest-bearing assets are not linked to the agricultural activity of the units and because it is very difficult to distinguish family assets from assets used in production ([^E0047]).

• 3.078. Interest is recorded in line with the accrual principle, i.e. as accrued interest (not as interest paid).

• 3.079. The value of the services provided by financial intermediaries being allocated among different customers, the actual payments or receipts of interest to or from financial intermediaries need to be adjusted to eliminate the margins that represent the implicit charges made by financial intermediaries. The estimated value of these costs should be subtracted from the interest paid by borrowers to financial intermediaries and added to the interest received by depositors.  The costs are regarded as remuneration for services rendered by financial intermediaries to their clients and not as an interest payment (see 2.107.1 and 2.108(i); ESA 2010, 4.51).

3. Rents (on land and subsoil assets)

(ESA 2010, 4.72 – 4.76)

• 3.080. Rents correspond to payments made to the owner of non-produced tangible assets (land and subsoil assets) in return for making assets available to another unit. In the EAA, this item corresponds mainly to rents paid on land by holders to the landowners ([^E0048]).

• 3.081. Where the owner pays certain charges directly linked to agricultural activity (property tax, the cost of maintaining land, etc.), the rents to be recorded should be reduced accordingly. These charges are accounted for as other taxes on production (in the case of property tax) or intermediate consumption (in the case of land maintenance).

• 3.082. Rents on land do not include the rentals of buildings or dwellings situated on it; those rentals are treated as the payment for a market service provided by the owner to the tenant of the building or dwelling, and are to be recorded in the accounts as the intermediate consumption of services or as final consumption expenditure (household accounts), depending on the type of tenant unit. If there is no objective basis on which to split the payment between rent on land and rental on the buildings situated on it, the whole amount is to be recorded as rent on land.  This rule is an adapted version of the ESA recommendation (cf. ESA 2010, 4.73) ([^E0049]).

• 3.083. All rent on land should be recorded under this heading whether the land is rented for less or more than one year.

• 3.084. Rents do not include:

• — the rental value of dwellings contained in these buildings; this is remuneration for a market service which is a component of private consumption (i.e. the occupant pays the rent from his net residual income),

• — rents paid for the professional use of non-residential buildings (cf. 2.108(a)),

• — depreciation of buildings,

• — current maintenance expenditure on buildings (cf. 2.106),

• — property tax (cf. 3.048(a)),

• — expenses relating to buildings insurance (cf. 2.108(g)).

• 3.085. In the case of land and buildings used by the owner, there is no need to account for notional rents. The rents corresponding to non-produced intangible assets such as patented assets and production rights (milk quotas), should be recorded as intermediate consumption (cf. 2.108(n)).

4. Investment income attributable to insurance policy holders (not covered by the EAA)

• 3.086. Investment income attributable to insurance policy holders corresponds to total primary incomes received from the investment of insurance technical reserves and pension funds (cf. ESA 2010, 4.68). These technical reserves are treated as assets belonging to the insured. The  ESA 2010 provides for the calculation of entrepreneurial income to include, as resources, incomes received from the investment of insurance technical reserves. This income is attributed to the insured as property income attributed to insurance policy holders. The latter is treated as being paid back to the insurance enterprises in the form of additional premiums, since, in practice, the income is retained by them (cf.  ESA 2010, 4.69).

• 3.087. Investment income attributable to insurance policy holders is not covered by the EAA. In fact, in order to be meaningful, a measure for the income of agricultural activity should:

• — include all flows related to non-life insurance (value of the service, income attributed to insurance policy holders, net premiums and claims): in this case, the income measured appears after description of all transactions of redistribution (between insurance policy holders and insurance enterprises and between periods) linked to non-life insurance, or

• — only take into account the value of the service (which is definitely acquired from the insurance enterprise) (cf. 2.108. (g)): in this case, the income measured appears before description of all these transactions of redistribution.

The EAA have opted for the second solution.

G. CAPITAL TRANSFERS

• (cf. ESA 2010, 4.145 to 4.167)

• 3.088. The only capital transfers recorded in the EAA are receivable capital transfers, i.e. investment grants and other capital transfers. These distributive transactions are recorded in the capital account (cf. 1.41 and 1.48).

• 1. Investment grants

• 3.089. Investment grants are capital transfers, in cash or kind, effected by general government or the rest of the world to other resident or non-resident institutional units with the aim of financing, in part or in full, the cost of acquiring fixed capital goods (cf. ESA 2010, 4.152). Investment grants from the rest of the world comprise those granted directly by the institutions of the European Union via the European Agricultural Guarantee Fund (EAGF) and the European Agricultural Fund for Rural Development (EAFRD).

• 3.090. Interest subsidies are not included under investment grants (cf. 3.064), even if they are intended to facilitate investment transactions. It should be remembered, however, that if a grant also contributes to financing debt retirement and the payment of interest on the capital and if it is not possible to separate it from these two components, then the grant should be recorded in its entirety as an investment grant.

• 3.091. The most important types of other grants made by the EAGF, EAFRD and investment grants for agriculture are:

• — grants for restructuring orchards or vineyards, in so far as they are the subject of a replanting obligation (cf. 3.067),

• — reimbursement, for account of general government, of loans contracted by production units to finance their investment,

• — start-up grants to young farmers to help them finance the acquisition of assets.

• 3.092. Investment grants in cash should be recorded when payment is due to be made. Investment grants in kind are recorded when the ownership of the asset is transferred (cf. ESA 2010, 4.162).

• 1. Other capital transfers

• 3.093. Other capital transfers cover transfers other than investment grants and capital taxes which do not themselves redistribute income but redistribute saving or wealth among the different sectors or subsectors of the economy or the rest of the world. They can be made in cash or in kind (cases of debt assumption or debt cancellation) and correspond to voluntary transfers of wealth (ESA 2010, 4.164).

• 3.094. Other capital transfers differ from investment grants in two aspects:

• — only general government may pay out investment grants whereas all institutional units may pay out other capital transfers,

• — investment grants are limited to payments associated with the acquisition of a fixed asset whereas other capital transfers can be linked to any form of transfer of saving or assets between units.

• 3.095. Other capital transfers may take the form of compensation, by general government or by the rest of the world, to owners of capital goods that had been destroyed by acts of war or natural disasters, such as floods, etc.  They also include transfers from general government to cover losses accumulated over several financial years or exceptional losses from causes beyond the control of the enterprise (cf. ESA 2010, 4.165).

• 3.096. In the case of agriculture, other capital transfers also include:

• — grants for the permanent abandonment of orchards or vineyards,

• — grants for the cessation or reduction of milk production (in so far as they affect, explicitly or implicitly, the value of quotas),

• — compensation for exceptional and catastrophic losses of fixed capital goods used in the production of agricultural goods (e.g. animals and equipment) (cf. 2.045 and 3.067),

• — start-up grants to young farmers for purposes other than financing the acquisition of assets,

• — grants to compensate for reduction of the value of assets or to reduce debts,

• — major payments in compensation for damage or injuries not covered by insurance policies (except payments by general government or by the rest of the world described in ESA 2010 under 4.165 (a)) awarded by courts of law or settled out of court, for example payments for compensation for damage caused by major explosions, oil spillages, etc. (ESA 2010, 4.165 (h)).

• 3.097. Other capital transfers in cash are recorded when payment is due (and, in the case of transfers in kind, when ownership of the asset is transferred or when the debt is cancelled by the creditor).

H. CONSUMPTION OF FIXED CAPITAL

• (cf ESA 2010, 3.139- 3.145)

• 3.098. The foreseeable wear and tear and obsolescence of fixed capital goods over the accounting period represent a charge which is implicit so long as the item is not replaced by a new acquisition. This wear and tear and obsolescence are measured by fixed capital consumption. Its inclusion under ‘uses’ in the production account allows expenditure on fixed capital formation to be distributed over the entire period of use.

• 3.099. If the economic life of the means of production is more than one year, the consumption of fixed capital represents the amount of fixed capital used up in the production process during the accounting period as a result of normal wear and tear and foreseeable obsolescence ([^E0050]). If, on the other hand, the means of production used have an economic life of less than one year, the wear and tear is recorded as intermediate consumption.

• 3.100. All fixed capital goods (i.e. products) are the subject of consumption of fixed capital (although some flexibility is required in specific cases; cf. 3.105). This includes tangible and intangible fixed assets, major improvements to non-produced assets and the costs associated with the transfer of ownership. The consumption of fixed capital is not calculated for either stocks or work in progress, or for non-produced assets such as land, underground deposits and patented assets.

• 3.101. The consumption of fixed capital is only one component of the change in the value of assets (together with GFCF, other changes in volume and nominal holding gains (net of losses); cf. 2.134). In particular, the consumption of fixed capital does not include other changes in the volume of assets (other than those due to GFCF):

• — exceptional losses due to disasters (earthquakes, war, drought, epidemics, etc.),

• — unforeseeable obsolescence, which is the difference between provisions made in the consumption of fixed capital for normal wear and tear and actual losses, accidental events causing depreciation greater than that accounted for on the basis of the anticipated consumption of fixed capital,

• — changes in the classification of fixed assets, i.e. changes in their economic use, as in the case of farming land or buildings converted for private use or a different economic use.

• 3.102. The consumption of fixed capital, which has to be distinguished from depreciation calculated for fiscal purposes and that appearing in the company accounts, should be evaluated on the basis of stocks of fixed capital goods and the (average) probable economic life of the various categories of goods in question. If no information on the stock of fixed capital goods is available, it is recommended that it be calculated using the perpetual inventory method and that its acquisition price in the reference period be evaluated (i.e. the replacement value of the assets during the reference year, not on the basis of historic values). The replacement value is ascertained from the prices which holders have to pay, during any given reference period, to replace a fixed capital good by a new one which resembles it as closely as possible. It is necessary to proceed in this manner in order to calculate net domestic product correctly.

• 3.103. The consumption of fixed capital is calculated using the linear depreciation method, i.e. by attributing the value of the fixed capital good in question evenly throughout the period in which it is used. The rate of depreciation is defined by the formula 100/n, where ‘n’ represents the probable economic life of this category in years (‘n’ may vary from one country to another and over time). The rate of depreciation can, in certain cases, be geometric. In view of the use of the current replacement price and the fixed rate of consumption of fixed capital, the consumption of fixed capital varies from year to year unless the purchaser prices remain unchanged throughout the entire normal economic life of the asset.

• 3.104. The consumption of fixed capital in the form of the costs associated with the transfer of the ownership of produced tangible and intangible assets should be calculated on the basis of an average economic life, conventionally put at one year.

• 3.105. The consumption of fixed capital in animals corresponds to the anticipated decline in the productivity of animals if they are used for production purposes (milk, wool, etc.), which is reflected in the current value of future income obtainable form these animals. As the value of future income from productive animals declines over time, the animals will have to become the object of consumption of fixed capital. Given the practical difficulties of calculating the consumption of fixed capital for this type of asset, however, it was felt that the consumption of fixed capital should not be calculated for productive animals. The decision to exclude animals from this calculation was based on the following considerations:

• — depreciation in terms of productivity and economic value is linked to age but is not a direct, regular and continuous function of it, as is otherwise implicitly the case for depreciation,

• — the withdrawal of animals from the productive herd may be a function of the economic environment (changes in the prices obtainable for slaughtered animals and the prices of animal feedingstuffs, etc.).

• 3.106. Although these considerations are not a hindrance to calculating the consumption of fixed capital for livestock, they do make such calculations very complicated in terms of adequate definitions of average life and rates of consumption of fixed capital. Otherwise, it would be difficult to ensure consistency between forecast and actual average depreciation of animals.  This treatment also ensures compatibility between the EAA and the ESA 2010 (cf. ESA 2010, 3.140) and microeconomic accounts of the farm accountancy data network and obviates the need to distinguish between livestock having the character of fixed capital goods and livestock having the character of stock.

IV.   AGRICULTURAL LABOUR INPUT

• 4.01. Agricultural employment covers all persons — both employees and self-employed — providing salaried and non-salaried labour input to the resident units performing characteristic activities (agricultural and inseparable non-agricultural secondary activities) of the agricultural industry of the EAA.

All persons of retiring age who continue to work on the holding are included in agricultural employment.

Persons having not reached school-leaving age are not included.

• 4.02. Employees are defined as all persons who, by agreement, work for another resident institutional unit (which is an agricultural unit) and receive a remuneration (recorded as compensation of employees, cf. Section C of Chapter III). The labour input provided by employees is referred to as salaried labour input. By convention, labour of non-family workers is classified as salaried labour input. When an agricultural unit is organised as a conventional company (cf. 5.09), all the labour input performed is classified as salaried labour input.

• 4.03. Self-employed persons are defined as persons who are the sole owners, or joint owners, of the unincorporated enterprises in which they work. The labour input provided by self-employed persons is referred to as non-salaried labour input. Members of the holder's family who do not receive a compensation which is predefined and calculated according to their actual work are classified as self-employed.

• 4.04. In the case of specific companies (cf. Section B of Chapter V), the labour input of workers is treated in the same manner as in unincorporated enterprises (sole proprietorships). The directors/shareholders share in the mixed income of the unit (non-salaried labour input), whilst their employees receive a remuneration (salaried labour input).

• 4.05. Total hours worked represent the aggregate number of hours actually worked as an employee or self-employed for resident agricultural units, during the accounting period.

• 4.06. A description of what total hours worked include and exclude can be found in ESA 2010 (11.27 and 11.28). Total hours worked do not cover work for the private household of the holder or manager.

• 4.07. Annual work units (AWUs) are defined as full-time equivalent employment (corresponding to the number of full-time equivalent jobs), i.e. as total hours worked divided by the average annual number of hours worked in full-time jobs within the economic territory.

• 4.08. One person cannot represent more than one AWU. This constraint holds even if someone is working in the agricultural industry for more than the number of hours defining full time.

• 4.09. The agricultural labour input of persons who work less than full time on agricultural holdings is calculated as the quotient of the number of hours actually worked (per week or per year) and the number of hours actually worked (per week or per year) in a full-time job.

• 4.10. The number of hours actually worked in a full-time job is not necessarily the same for all categories of labour. It is possible that the number of hours comprising a full-time job used for self-employed persons is greater than that used for employees. For in the latter case, the maximum number of hours to be worked are laid down in a contract.

• 4.11. The number of hours worked by a person is not to be adjusted by some coefficient because of age (i.e. under 16 or over 65) or gender. Equality must be applied. ‘Full-time’ is determined by the number of hours worked and not as an evaluation of an amount and/or a quality produced.

• 4.12. Unless there are reasons for preferring alternative sources, the AWU representing full-time work in agriculture should be based on the current definition in the Community surveys on the structure of agricultural holdings, as the minimum hours required by the national provisions governing contracts of employment. If these do not indicate the number of annual hours then 1 800 hours is to be taken as the minimum figure (225 working days of eight hours per day).

V. AGRICULTURAL INCOME INDICATORS

• 5.01. One of the principal objectives of the EAA is to measure agricultural income and changes therein.

• A. DEFINITION OF INCOME AND BALANCING ITEMS

• 5.02. Income can be defined as the maximum amount which the beneficiary can consume over a given period without reducing the volume of his/her assets. It can also be defined as being the total of the consumption and change in value of assets held over a given period, all other things being equal, as income represents what could have been consumed. The distinction made in the  ESA 2010 between current accounts and the capital account enables maximum potential consumption to be studied using the measure of consumption and saving in the current accounts and that of the change in the value of assets in the capital account.

• 5.03. The sequence of accounts (cf. 1.43) of the agricultural industry makes it possible to calculate three balancing items which can be used as an income aggregate for the agricultural industry: net value added, net operating surplus (net mixed income) and net entrepreneurial income. The relationship between these items is set out in the following:

Production account	Production account	Production account	Generation of income account	Generation of income account	Generation of income account	Entrepreneurial income account	Entrepreneurial income account	Entrepreneurial income account
P.1		Output	B.1n		Net value added	B.2n B.3n		Net operating surplus/net mixed income
P.2	–	Intermediate consumption	D.1	–	Compensation of employees	D.41	+	Interest receivable [^E0051]
P.51c	–	Consumption of fixed capital	D.29	–	Other taxes on production	D.41	–	Interest payable
			D.39	+	Other subsidies on production	D.45	–	Rent paid
B.1n	=	Net value added	B.2n B.3n	=	Net operating surplus/net mixed income	B.4n	=	Net entrepreneurial income
D.29	–	Other taxes on production
D.39	+	Other subsidies on production
	=	Net value added at factor cost/factor income

Only interest received by agricultural units organised as companies.

• 5.04. Net value added of the industry measures the value created by all the agricultural LKAUs, after the consumption of fixed capital. Given that output is valued at basic prices and intermediate consumption is valued at purchaser prices, net value added contains subsidies on products less taxes on products. Net value added at factor cost (defined as net value added at basic prices less other taxes on production plus other subsidies on production) measures the remuneration of all factors of production (land, capital, labour) and can be termed ‘factor income’, as it represents all the value generated by a unit engaged in a production activity.

• 5.05. Net operating surplus measures the yield from land, capital and non-salaried labour. It is the balance of the generation of income account which indicates the distribution of income between the factors of production and the general government sector. The net value added and net operating surplus are calculated for the industries.

• 5.06. Net entrepreneurial income, obtained by adding the interest received by agricultural units organised as companies to the net operating surplus and then deducting rent (i.e. farm and land rents) and interest payments, measures the compensation of non-salaried labour, remuneration from land belonging to units and the yield arising from the use of capital. It is similar to the corporate-accounting concept of current profit before distribution and taxes on income. Although net entrepreneurial income is not always calculated for industries, it can generally be evaluated for the agricultural industry as it is possible to determine the part of interest and rents linked exclusively to agricultural activity (and to secondary, non-agricultural activities).

• 5.07. In the case of sole proprietorships, entrepreneurial income represents, on the one hand, the compensation of the work performed by the agricultural holder (and the work of non-salaried family members) and, on the other hand, the income remaining with the enterprise, without it being possible to separate these two components (the term ‘holder’ as used here naturally refers to all persons who run sole proprietorships in this industry). It is, therefore, a mixed income. Like any other industry, however, the agricultural industry comprises production units that belong to different types of institutional units: companies and sole proprietorships. There is a difference between entrepreneurial income generated by sole proprietorships and that generated by units organised as companies. In the latter case, it represents ‘straight’ entrepreneurial income as it excludes any labour income (compensation of work has to be regarded as compensation of paid labour even if it relates to the administrators and shareholders of the company).

• 5.08. It has to be borne in mind that the income aggregates, obtained as balancing items of the sequence of accounts of the industry, are not indicators of total income or of the disposable income of households employed in agriculture, because the latter, in addition to their purely agricultural incomes, may also have income from other sources (non-agricultural activities, remuneration, social benefits, income from property). In other words, agricultural income must not be regarded as farmers' income. Moreover, this measure of income relates to the income generated by agricultural activities (as well as inseparable non-agricultural secondary activities) over a given accounting period, even though in certain cases the corresponding revenues will not be received until a later date. It does not, therefore, constitute the income effectively received in the course of the accounting period itself.

• B. TREATMENT OF THE INCOME OF UNITS ORGANISED ON A CORPORATE BASIS

• 5.09. Sole proprietorships (or family holdings) are the most common form of agricultural units in the European Union. However, some agricultural production units may be organised on a corporate basis and may take the form either of conventional companies (i.e. their organisational set-up is similar to that of companies which exist in other sectors of the economy) or of companies having more specific characteristics (as, for example, in the case of a farmer who, for tax reasons, creates a specific separate company for the commercial part of his economic activity, or of a group of farmers who form an association with the aim of pooling land and labour within the framework of certain types of cooperatives).

• 5.10. The net entrepreneurial income of the agricultural industry is thus made up of the following three components:

• — the ‘mixed’ entrepreneurial income of sole proprietorships (unincorporated enterprises),

• — the ‘straight’ (pure) entrepreneurial income of ‘conventional’ companies,

• — the ‘mixed’ entrepreneurial income of companies specific to the agricultural industry.

These three components are set out in the chart under 5.11.

• 5.11. ‘Straight’ entrepreneurial income must exclude any compensation of employees as well as any rents paid prior to the distribution of profits. For most companies specific to agriculture, however, it is difficult to separate the remuneration of shareholders, for land and labour inputs, from profit distribution. It is recommended, therefore, that the yardstick for measuring agricultural entrepreneurial income should refer to ‘mixed’ income for this type of agricultural unit, i.e. that it should include the compensation of shareholder employees for their work as well as rents. Remuneration and rents should not, therefore, be deducted from the calculation of entrepreneurial income in the case of these specific companies. For the calculation of entrepreneurial income they are thus assimilated to a group of sole proprietorships. On the other hand, in the case of ‘conventional’ companies the distinction between remuneration and profit distribution must be made clearly.

Image omitted; see official source

• C. DEFINITION OF THE AGRICULTURAL INCOME INDICATORS

• 5.12. The three agricultural income indicators can be described as follows:

• — indicator A: index of the real income of factors in agriculture per AWU

This yardstick corresponds to the real net value added at factor cost of agriculture per total AWU ([^E0052]).

• — indicator B: index of real net agricultural entrepreneurial income, per non-salaried AWU

This indicator presents the changes in net entrepreneurial income over time, per non-salaried AWU. Converted into the form of an index for each Member State, it provides information on trends rather than on income levels. It is most useful in those countries where agriculture is organised in the form of sole proprietorships. On the other hand, in view of the existence of ‘conventional’ companies which generate entrepreneurial income exclusively with paid labour, indicator B is overestimated in comparison with a notion of individual income. This drawback may prevent a comparison of income levels between Member States if the proportions of ‘conventional’ companies differ very much,

• — indicator C: net entrepreneurial income of agriculture

This income aggregate is presented as an absolute value ([^E0053]) (or in the form of an index in real terms). It allows comparability over time of the income of the agricultural industry between Member States.

• D. AGGREGATION OF INCOME INDICATORS FOR THE EUROPEAN UNION

• 5.13. Indices and rates of change for the European Union as a whole can be calculated either as weighted averages of the national indices or rates of change, or directly on the basis of EU aggregates obtained by converting national data into euro or into purchasing power standards (PPS). In both cases, a base year has to be chosen; either the year used to determine the shares included from the various countries in the calculation of the Community averages, or the year whose exchange rates were used to calculate the aggregates.

• 5.14. Slightly different methods and different base years are used depending on whether the calculations represent an analysis of a short-term trend (changes in year ‘n’ compared with year ‘n-1’) or of a long-term trend (generally from 1980 to year n).

• 5.15. For the analysis of a short-term trend, the rates of change of the nominal or real income indicators of the European Union for year n compared with year n-1 are calculated as weighted averages of the corresponding rates of change estimated in the Member States, the weighting coefficients being calculated on the basis of the income aggregates for year n-1, converted into euro at the exchange rates of year n-1; these coefficients are naturally specific for each aggregate. This method based on year n-1 appears the most appropriate for a short-term analysis, and is the one that is most consistent with that used by individual Member States.

• 5.16. For analysis of the long-term trend, the indices and rates of change of the income indicators for the European Union are calculated on the basis of the EU aggregates expressed in euro at fixed exchange rates: for values expressed in real terms (i.e. after deduction of the effect of the average rise in prices), the deflators used are also based on a fixed base year.

• E. DEFLATION OF INCOME INDICATORS

• 5.17. For each Member State, the indices and the changes, in real terms, of the values of the income indicators are obtained by deflating the corresponding nominal data with the implicit price index of GDP.

• 5.18. Important factors such as reliability and comparability are points in favour of using this deflator. The implicit price index of GDP is a general price indicator for all goods, products and services throughout the economy. The price index of national final uses also comes into consideration as a deflator. Unlike the GDP price index, it takes the effect of external trade equally and directly into account and thus reflects more quickly and clearly any charges in the prices of imports (e.g. energy price movements). Nevertheless, in order to safeguard comparability with other statistics compiled by the European Commission, it was decided not to introduce a new deflator.

• 5.19. Real income aggregates for the European Union as a whole are obtained by first deflating the nominal values (at current prices) recorded in the various Member States, applying the implicit price index of GDP of the particular Member State concerned, and then converting them into EURO (at 1995 exchange rates for long-term analysis and at those of year n-1 for the short-term trend, as indicated above). The results are thus added up so as to obtain the real values for the European Union. It is on the basis of these aggregates in real terms that the indices and rates of change for the European Union are calculated, which means that an ‘EU deflator’ is never explicitly involved.

VI.   VALUATION OF EAA AT CONSTANT PRICES

A. PRICE AND VOLUME MEASURES

• (cf. ESA 2010, Chapter 10)

• 6.01. For the purposes of economic analysis, when looking at how values change, it is useful to distinguish between those value changes due to changes in volume and those due to changes in price.  The ESA 2010 (10.13 to 10.23) clearly states that the price component should only include changes relating to prices and that all other changes should be included in the volume component. Thus, differences in quality between products (physical characteristics, types of retail outlet, etc.) are to be taken into account as volume and not price changes.

• 6.02. For many goods and services there exist several variations which differ in quality. The  ESA 2010 defines several factors which give rise to differences in quality, but the most important for the EAA is that linked to physical characteristics. This recognises that within the definition of a given product, there may be physical differences which imply that the physical units (e.g. one tonne) are not identical in an economic sense. An example of this is with two tonnes of grain sold in two consecutive years. In year one all the grain is of milling quality, in year two, less than half is of milling quality, the rest is sold for feed. This means that the average quality of the grain has fallen.  The other difference in quality, important for the EAA, is that of a shift in sales of a product between two differently priced markets, e.g. domestic and external, industrial use and sales to consumers (cf. ESA 2010, 10.13 to 10.18).

• 6.03. The indicators of volume and price used to compile data at constant prices have to take account of changes in quality. It is therefore recommended that work is conducted at the greatest level of detail in order to get as close as possible to entirely homogeneous elementary products. If the elementary products are entirely homogeneous, changes in volume can be estimated on the basis of changes in quantity.

• 6.04. However, statistical information is often only available at a more aggregated level and therefore no longer concerns strictly homogeneous products.  In this case, the ESA 2010 (10.32) states that it is preferable to deflate the value for the current year by a suitable price index to estimate changes in volume (ESA 2010, 10.01).

• 6.05. The level of detail for which the index used is assumed to be an elementary index (the product under investigation is thus considered as homogeneous) is called the elementary level of aggregation. In the EAA, the elementary level of aggregation corresponds at least to the most disaggregated level of the nomenclature within the data transmission table. A greater level of detail is, however, desirable for compiling price indices.

• 6.06. For each aggregate of goods and services shown in the accounts, price and quantity measures have to be constructed so that

value index = price index × volume index

This means that each and every change in the value of a given flow must be attributed to either a price change or a change in volume or a combination of the two (cf. ESA 2010, 10.12).

• 6.07. The systematic breakdown of the changes in current value into the components ‘changes in price’ and ‘changes in volume’ is restricted to flows representing transactions of goods and services and to elements concerned in the valuation of these transactions (output, intermediate consumption, consumption of fixed capital, gross value added, net value added, GFCF, change in stocks, taxes and subsidies on products).

B. PRINCIPLES AND METHOD FOR COMPILING EAA AT CONSTANT PRICES

1. Choice of index formula

• 6.09. In accordance with ESA 2010 (10.20), in the EAA, changes in volume are measured using Laspeyres-type indices and changes in price are measured using Paasche-type indices.

Laspeyres volume index:

Image omitted; see official source

Paasche price index:

Image omitted; see official source

For each elementary product:

• — p0 : represents the price recorded in the base year 0,

• — pn : represents price recorded in year n,

• — q0 : represents the quantity recorded in the base year 0,

• — qn : represents the quantity recorded in year n,

• — V0 : represents the value recorded in the base year 0: (V0 = p0q0).

2. Base year

• 6.10. Changes in volume are measured using Laspeyres-type indices: changes in the quantities of elementary series are therefore weighted by the value in the base year. Changes in price are measured using Paasche-type indices: changes in the prices of elementary series are therefore weighted by the value in the current year at the prices for the base year.

• 6.11. The base year is the year from which the prices are used to compile the weighting scheme.

• 6.12. The most accurate way to measure changes in volume from one year to another is to use the most recent base year available. This approach guarantees that weightings are relatively up-to-date and avoids problems linked to weighting products that are no longer produced and new products that have emerged. It is for this reason that the EAA measures changes in volume using the weightings for the preceding year.

3. Presenting series in relation to a reference year

• 6.13. The year used for submitting and presenting data at constant prices can be different from the base year; it is called the reference year. In a series of indices, the reference year is the one that takes the value 100.

• 6.14. Series of volume indices in the prices of a reference year are obtained by chaining indices calculated in the prices of the preceding year (cf. ESA 2010, 10.20).

• 6.15. It is important that a change of reference year has no effect on the changes in volume with respect to the preceding year. It is for this reason that EAA data are presented in relation to a fixed reference year by re-referencing each variable separately, regardless of whether these are aggregates or elementary indices.

• 6.16. Example:

Let us consider two homogeneous elementary products, A and B. The following series are based on the price structure for the preceding year:

	n P n	n – n + 1 volume index	n + 1 P n	n – n + 1 price index	n + 1P n + 1	n + 1 – n + 2 volume index	n + 2P n + 1	n + 2 – n + 1 price index	n + 2P n + 2
A	100	105,0	105	110,0	115	102,0	117	108,0	126
B	300	110,0	330	95,0	314	90,0	283	105,0	297
Total	400	108,8	435	98,6	429	93,2	400	105,8	423

The volume and price indices for the whole (A + B) depend on the weighting given to each product, A and B.

If these series are expressed in relation to a fixed reference year (e.g. n), the only way to retain the same n/n-1 volume indices is to chain the indices separately. This gives the following series (base equal to 100 in n):

	n	n + 1	n + 2
A	100	105,0	107,1
B	100	110,0	99,0
Total	100	108,8	101,4

(101,4 = 108,8 * 93,2/100)

The values at constant prices expressed in relation to the reference year n are:

	n	n + 1	n + 2
A	100	105	107,1
B	300	330	297,0
Total	400	435	405,6

(405,6 = 400 * 101,4/100)

As a result, the account is no longer additive. Adding the values at constant prices for A and B gives the following series:

	n	n + 1	n + 2
A + B	400	435	404,1

Other than in the year following the reference year, the re-referenced series are not additive.

• 6.17. According to ESA 2010 (10.23), the non-additive constant price data are published without any adjustment ([^E0054]). This is also the approach taken by the EAA. It is to be explained to users, however, that the tables are not additive.

4. Calculation of value added at fixed year prices

• 6.18. Value added constitutes the balancing item of the production account. As such, it is not possible to split value added directly into a price component and a volume component.  The theoretically correct method for calculating value added at fixed year prices is to carry out ‘double deflation’ (cf. ESA 2010, 10.31-10.32).

• 6.19. Gross value added expressed in the prices of the preceding year is therefore defined as the difference between output measured in the prices of the preceding year and intermediate consumption measured in the prices of the preceding year. Net value added in the prices of the preceding year is defined as the difference between gross value added in the prices of the preceding year and consumption of fixed capital in the prices of the preceding year. The value added in prices of a fixed reference year is obtained by re-referencing.

• 6.20. Example:

A series of current values and values in the prices of the preceding year (volumes) concerning output and intermediate consumption is set out below:

	n P n	n + 1 P n	n + 1 P n + 1	n + 2 P n + 1	n + 2 P n + 2
Output	150	160	170	180	200
Intermediate consumption	40	30	35	40	45

The value added in volume terms is obtained by deducting the volume of intermediate consumption from the volume of output. The following series is derived:

	n P n	n + 1 P n	n + 1 P n + 1	n + 2 P n + 1	n + 2 P n + 2
Gross value added	110	130	135	140	155

In this way, the following volume indices in the prices of the preceding year are obtained:

	n + 1	n + 2
Gross value added	118,2	103,7

(118,2 = 130/110 * 100) (103,7 = 140/135 * 100)

The gross value added of a particular year in prices of year n (fixed year prices) is derived by multiplying the current value for n by the volume chain index.

VA n + 1 (in n prices) = 110 * 1,182 = 130

VA n + 2 (in n prices) = 110 * 1,182 * 1,037 = 135.

5. Breakdown of taxes and subsidies on products into volume and price components

• 6.21. The breakdown of valuations at basic price into respective volume and price components presupposes that this breakdown also applies to the taxes and subsidies on products. The choice made in the EAA is the following one:

• 6.22. The volume index of the subsidy (or the tax) on product is identical to the volume index of the output at the producer price. In this case, the volume index of the output is the same whether expressed in the producer price or in the basic price.

• 6.23. This solution has another advantage: the volume index is independent of the method of valuation. Consequently, the interpretation of the price and volume indices at the basic price, is straightforward: for a perfectly homogeneous basic product, the volume index is identical to the quantity index; the price index reflects the change in the average basic price.

• 6.24. Example:

For a given product, the value of output at the producer price in year n is 1 000 ; the value of output in year n+1 is 900. The volume index of output is 102.

This product is subsidised. The value of the subsidy for year n is 100; the value of the subsidy for year n+1 is 150.

The volume/price breakdown of the subsidy is carried out in the following way:

	Value n	n+1/n volume index	Volume n+1	n+1/n price index	Value n+1
Output at producer prices	1 000	102,0	1 020	88,2	900
Subsidy on products	100	102,0	102	147,0	150
Output at basic prices	1 100	102,0	1 122	93,6	1 050

The volume index of the subsidy is the same as that of the output at the producer price.

VII.   REGIONAL ECONOMIC ACCOUNTS FOR AGRICULTURE (‘REAA’)

A. GENERAL PRINCIPLES

1. Introduction

• 7.01.Regional accounts play an important role in the formulation, implementation and evaluation of regional policies. Objective, reliable, consistent, coherent, comparable, relevant and harmonised regional statistical indicators provide a firm foundation for policies aimed at reducing economic and social disparities between the regions of the Union.

• 7.02.The REAA are a regional-level adaptation of the EAA.

• 7.03.The REAA comprise the same set of accounts as the EAA, but conceptual and measurement problems result in a set of accounts for regions which are more limited in scope and detail than EAA at national level.

• 7.04.As regional accounts, the REAA shall be compiled on the basis of regional data collected directly, and of national data that have regional breakdowns based on assumptions. The lack of sufficiently complete, timely and reliable regional information requires assumptions in compiling regional accounts. That implies that some differences between regions are not necessarily reflected in regional accounts (ESA 2010, 13.08).

2. Regional economy, regional territory

• 7.05.Any compilation of regional accounts, whether they refer to industries or institutional sectors, needs a strict definition of the regional economy and regional territory. In theory, the agricultural industry in a region covers the units (agricultural holdings) engaged in agricultural activities (cf. 1.60 to 1.66) on the regional territory.

• 7.06.A regional economy of a country is part of the total economy of that country. The total economy is defined in terms of institutional units and sectors. It consists of all the institutional units that have a centre of predominant economic interest in the economic territory of a country. The economic territory does not coincide exactly with the geographic territory (cf. 7.08). The economic territory of a country is divided into regional territories and the extra-regio territory (ESA 2010, 13.09).

• 7.07.The regional territory, as defined in the ESA 2010, consists of that part of the economic territory of a country that is directly assigned to a region. Free zones, bonded warehouses and factories under customs control, are attached to the regions where they are located.

• 7.08.However, that division of territory is not totally consistent with the concept of national economic territory as used by the national accounts. The extra-regio territory is made up of parts of the economic territory of a country which cannot be attached directly to a single region, and which are excluded from the REAA, i.e.:

• (a) the national air-space, territorial waters and the continental shelf lying in international waters over which the country enjoys exclusive rights;

• (b) territorial enclaves, i.e. geographic territories situated in the rest of the world and used, under international treaties or agreements between States, by general government agencies of the country (embassies, consulates, military bases, scientific bases, etc.);

• (c) deposits of oil, natural gas etc. in international waters, outside the continental shelf of the country, worked by resident units.

• 7.09.The Nomenclature of Territorial Units for Statistics (NUTS) classification established by Regulation (EC) No 1059/2003 of the European Parliament and of the Council ([^E0055]) provides a single, uniform breakdown of the economic territory of the Union. The REAA require statistics at NUTS 2 level as commonly established under the current arrangements under that Regulation. For national purposes, regional accounts may also be compiled at a more detailed regional level, namely at NUTS 3 level, where applicable (ESA 2010, 13.12).

3. Basic unit in the compilation of the REAA

• 7.10.The units used for the regional accounts by industry are local KAUs. The local KAU is the observable form of the production unit.